Comparison between Mutual Funds and Hedge Funds

Hedge funds provide
investors with many investment possibilities and tools that are not available
to mutual fund investors. The latter are subject to different regulations by
the SEC (Securities and Exchange Commission), which prevent them from applying
such strategies as leverage, short selling, derivatives and etc. which hedge
fund investors can freely apply.

Hedge funds are
preferred investment tool when an investor wants to manage the investment risk
to which s/he is exposed. This has resulted from the relative flexibility that
hedge funds enjoy.

Different performance
incentives contribute to the high success of most hedge funds. Hedge fund
investors tend to invest in the hedge fund they manage. As a result they tend
to share both the risks and rewards from their activities. This is not the case
with mutual fund managers. The award of hedge fund managers is dependent on the
positive returns they succeed to generate for their clients, commonly referred
to as incentive fees. On the other hand, mutual fund managers are paid on the
volume of assets under their management, with no regard to the returns they
generate. The hedge fund industry has managed to attract some of the best performing
Wall Street professionals thanks to the incentive fee structure.

The hedge fund
industry has managed to grow in a rapid rate, which has also been the case with
the rate of growth in the hedge fund assets. Even though the mutual fund
industry is far larger, the rapid growth of the hedge fund industry reflects
its recognized by the investors importance.

Under the conditions
of declining equity markets, hedge funds tend to do far better than mutual
funds. This means that they are better at the preservation of capital.